First-time buyers 30% less likely to default than those trading up

First-time buyers are 30 per cent less likely to default than those trading up or down, research from the Central Bank has found.

In a technical paper published yesterday, Designing Macroprudential Policy in Mortgage Lending: Do First-Time Buyers Default Less?, the Central Bank revealed that first-time buyers are four percentage points less likely to default than "second and subsequent buyers". It reports a default rate for first-time buyers of 10.3 per cent, which is 30.8 per cent lower than that for subsequent buyers.

The report supports earlier comments made by Patrick Honohan, the outgoing governor of the Central Bank. Speaking last February at the Trinity Economic Forum, Mr Honohan said first-time house buyers clearly represent a safer prospect for lenders.

When it comes to loan-to- values of 80-85 per cent, the report finds first-time buyers are even less likely to default, with a rate of default 45 per cent lower than subsequent buyers. The latest research is based on data from AIB, including EBS Building Society, Bank of Ireland, and Permanent TSB and covers a period from 1997 to 2013.

Default rate clearly lower

“The default rate is clearly lower for [first-time buyers] than [subsequent buyers] and this difference exists for all the loans in our sample across the time period of origination,” the authors of the report said.

According to the report first time buyers have a “much lower propensity to default than [subsequent buyers], despite the fact they have higher original loan-to-values, at 74 per cent compared to about 56 per cent for second time buyers. Their incomes are also lower, at about €56,000 compared with €69,000 for second-time buyers; and they have higher original loan to income levels of 3.44 compared with 2.83.

“Given the differential, policy makers who are calibrating macroprudential measures to manage risk in the mortgage market could take stock of such differences and incorporate this information into cap selection,” the research said.

In February, the Central Bank introduced new lending rules, restricting the amount people can borrow to 3.5 times income.

Non first-time residential buyers can borrow a maximum of 80 per cent of the property price. First-time buyers of residential properties can borrow 90 per cent of a property’s value up to €220,000 and 80 per cent of any amount above this limit. Investors are subject to a 70 per cent loan-to-value limit. Some exceptions are allowed.

A survey of brokers has found the new income rules are hitting first-time buyers with a “killer blow”. Across some 200 broker companies, respondents said the new loan-to-value limits – rather than a deposit of as much as 20 per cent – were proving a challenge for first-time buyers.

"The new income limits will mean that the majority of public sector workers, and those on medium to low incomes, will not be able to borrow enough to buy a home in the city," said Mortgage Brain Ireland chairman Michael Dowling.